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Corporate BondsPrivate debt

Roundtable Discussion: Investors keep discipline, wait for narrow space to broaden

Paris is a centre for continental European private debt activity that goes on outside the German Schuldschein and US private placement markets, which are both clearly defined by their legal documents.

This field of activity has great potential, above all because of two secular trends: the migration of corporate debt off banks’ balance sheets and into capital markets; and the exploration of institutional investors into private, illiquid credit.

But in recent years institutions investing in this space have been squeezed on several sides: by resurgent bank demand for credit, whether through loans or Schuldscheine; and by a bullish public corporate bond market, rated and unrated. Both have been stimulated by the European Central Bank’s assiduous quantitative easing.

With that set to end soon, will the space available to institutional lenders expand? And have investors managed to keep their discipline during these lean years and avoid taking dangerous risks?

GlobalCapital gathered leading private debt investors and banks in Paris in March to discuss these issues and other facets of this intriguing market.

Participants in the roundtable were:

Frederick de Graaf, origination, French corporates and public sector borrowers, Helaba

Kyra Guerrida, head of sales, France, UniCredit

Antoine Maspétiol, head of private corporate debt, Aviva Investors

Sandrine Richard, head of private debt in France and co-head of pan-European fund, Muzinich

Michael Spitzner, senior originator, debt capital markets corporates, BayernLB

Thierry Vallière, global head of private debt group, Amundi

Richard Waddington, head of loan sales and private debt, Commerzbank

Toby Fildes, GlobalCapital (moderator)

 

GlobalCapital: We’re here to talk about all aspects of private debt. But seeing that we’re in Paris, let’s start with the Euro private placement market, which began here and established itself very quickly. In the last couple of years issuance has fallen a bit, although the number of deals has been quite high, which indicates it’s becoming a small to mid-cap specialist product. But it seems to be having a bit of a resurgence — the last two or three months have been quite good for deals. Is that due to the imminent phasing out of quantitative easi and treasurers wanting to lock in low rates?

Antoine Maspétiol, Aviva: Volume has been somehow disappointing, since the first start of this market. However, it’s a new market, so we should not expect very big volumes, like those in the Schuldschein market and the US private placement market, which are much more mature.

And yes, the market is addressing smaller companies, so we continue to see a significant number of deals and the overall volumes reflect the size of the companies.

Back in 2012 and 2011 even, €100m tickets were frequent. I think now the average size of the ticket can be €10m or €20m, so it’s quite different in terms of our approach.

Richard Waddington, Commerzbank: The Euro PP is probably more bespoke in terms of the solutions it provides, and requires more focus and attention. On the whole, the deals are sub-investment grade, so they need to be structured correctly, and typically they’re small, club-style transactions.

Thierry Vallière, Amundi: Of course volume is a bit disappointing but the market is still not mature. However, it’s growing, because disintermediation is really a long term trend. It answers some needs, for companies that need to diversify their funding.

You also have some M&A and a lot of private equity funds that have raised record funds. So there is a huge demand for debt.

And on the other side, investors are evolving into an unprecedented, changing environment. They have to face unconventional monetary policy from the central banks. So they need to diversify their investments. They need to find assets with high return, low volatility and low correlation to other assets. This asset class answers to those needs.

Sandrine Richard, Muzinich: We have not invested in any Euro PP transactions so far. We have invested in more than 35 private debt transactions, but private debt is not only the Euro PP and Schuldschein. There are different instruments, typically senior debt, like club loans, unitranche, stretched senior, mezzanine.

For an acquisition it could be easy to have two different options on the table for an issuer. The right option would depend on the structure and if it addresses the points important to the board.

Also, you have optimisation of cost. And in their decision the board and shareholders also consider execution risk, among other constraints.

These types of instruments are not new but we have more and more appetite from investors for them. They compete with the Euro PP but I’m not sure the overlap is so important because they address different investors and different needs for the company.

GlobalCapital: So you’re doing what could be called direct lending?

Richard, Muzinich: Yes, but in France and some other countries direct lending is not real direct lending. Sometimes we still have to, and I say it positively, work with banks.

We mostly focus on small companies — typically in France companies with Ebitda below €20m. Ninety percent of them have all their financing provided by banks and are just looking for a partial diversification of funding.

Of course, because the price is so low, it would be a bit stupid not to raise money today. But the objective is not to push out the banks. It’s just to have diversification of funding, more flexibility, especially in the debt amortisation schedule — and to prepare the expansion of the company and the sophistication of their financial strategy. Usually, the steps are: direct lending, Euro PP or leveraged loans, then high yield and at the end of the day investment grade.

GlobalCapital: So you’re providing their first capital market financing?

Richard, Muzinich: Sometimes, it’s the first time a company raises debt outside its bank pool.

GlobalCapital: Thierry, you first mentioned the word disintermediation. Will finding new sources of

funding away from bank loans become an even

bigger factor?

Vallière, Amundi: All the funding sources are complementary to each other. Sometimes we compete for transactions with banks, but we have an absolutely different business model. Following the financial crisis, banks have really stringent regulations and this is not going to stop. Their cost of capital has increased loads and they have to rethink themselves and change their business models to originate to distribute.

On the other side, institutional investors are in a very challenging world, with this unconventional monetary policy that has adverse consequences across the asset class. So they also need to diversify themselves, to find some yield. These private markets are a perfect fit for them, because they have some premium and a relatively low volatility and low correlation to other asset classes. But they don’t have people on the ground very close to the companies.

Usually, to find a transaction you need to have those very large origination teams that you only find in the banking industry. So I think the two business models are really complementary: on one side the banks and on the other asset managers managing funds with real money investment.

GlobalCapital: Despite the creation of the Euro PP market about six years ago, we’ve seen a surprising development in the past couple of years: the Schuldschein has really taken off for French issuers. What do you think is behind its success?

Frederick De Graaf, Helaba: There has been a great appetite from our issuers to do Schuldschein deals. I think it comes from the Schuldschein’s light documentation and the trend of increasing issuance in the market since 2014. There was about €27bn issued last year.

We are developing our branch in France because there’s quite a huge demand from issuers to do Schuldscheine.

Waddington, Commerzbank: You’re right, the Schuldschein has been successful in France. For a lot of French treasurers, it’s about their cost of funds.

The various private debt products tend to occupy different spaces in the credit spectrum. Initially the Euro PP was investment grade, but quickly it crossed over to sub-investment grade. The Schuldschein is primarily investment grade-equivalent, maybe with a little bit of crossover, and then obviously we have true private debt, more in the single-B space. So you’ve got stratification of the market and the different private debt products have found their respective credit postcodes that they like to operate in.

The French treasurer is the king at getting the cheapest debt available. Presently, Schuldschein is the least expensive private debt product, principally because the investors want investment grade debt and they’re willing to go tighter on prices than the institutions active in the Euro PP space.

The Euro PP investors have a yield requirement that they’re less flexible on and the banks are willing to be more flexible in terms of price and structure. But they will remain investment grade.

So the Schuldschein has grown very successfully in France and become embedded as a part of the product offering, although 2017 was less active than 2016, because the unrated bond market has been very aggressive.

GlobalCapital: What has it replaced, though? Has it replaced the loan market as a source of funding?

Waddington, Commerzbank: Yes, I think it has mainly replaced drawn debt in the loan market as well as competing successfully with the unrated bond market. Some of the big Schuldschein deals in 2016 potentially could have been done in the bond market. The bond market tightened in 2017 and I think that’s part of the reason the volume of French Schuldschein issuance in 2017 was approximately half that in 2016.

Michael Spitzner, BayernLB: I think the development of the Schuldschein market in France came about for several reasons. Among the first countries outside Germany to begin issuing, France was one of the early birds.

It was partly for educational reasons. The product, with all its advantages, including being based on German law, but also its stability, flexibility and ease of handling, was explained to the French corporate world, which helped to make it familiar and increase trust in this formerly German product.

At least on our side, the first French issuer was Accor Hotels in 2008. This was a very important driver for the market and then others followed.

Since then, we have brought so many repeat issuers to the market for a second or third time, which has also helped to attract new issuers and investors to the market. France has a very big corporate sector, so there is huge potential.

Regarding the question whether other products have been replaced, I would say partially yes, but it depends on the issuer’s preferences — whether they want to diversify their investors, build a maturity profile, get good pricing or volume.

De Graaf, Helaba: Also, the economic situation in France is getting better, so we have an appetite from Schuldschein investors, which in turn encourages issuers.

We have our savings bank sector, which is a quite active and recurrent investor in Schuldscheine, but we’ve also seen since several years that we have Asian investors buying, who are also showing an appetite for French issuers.

Vallière, Amundi: The Schuldschein is a bit different from the real disintermediation market. It has had a lot of success but three quarters of the investor base is banks and less than a quarter real money investors, institutional investors. So it’s a completely different way to manage a portfolio, to assess the risk. Obviously an institutional investor cannot compete fairly in this market. Companies go in this market for the very cheap funding costs, the ease of execution and the documentation that is so weak.

For an institutional investor, to go on this market, it would be really to diversify. They would have to build a very granular portfolio, because you have absolutely no lever to negotiate with the company. That is completely different from what most institutional investors are doing in private debt. Usually they own quite a concentrated portfolio, between 20 or 40 transactions, and spend a lot of time in due diligence assessing the risk profiles of the companies and negotiating the documentation.

In the Schuldschein market you have only one week to execute, you have not a word to say. So it’s a completely different way to manage and this is an investor base that is completely different from the disintermediation market.

GlobalCapital: So it’s not necessarily giving an issuer different investors?

Waddington, Commerzbank: On the whole it’s predominantly banks, although there are some institutional investors who invest in the product. But usually it’s non-relationship lenders. So the draw for the issuer is a diversification away from its relationship banks.Spitzner, BayernLB: These types of institutional investors do exist in the Schuldschein as well, but it depends what the issuer’s target is.

If the issuer is seeking to issue long tenors and have a selected group of institutional investors, it can certainly achieve that in both the Euro PP and Schuldschein markets. The history and origin of the two products are different, but the issuer’s objectives can be achieved. When you want to have institutional investors in the order book, of course you adjust some of your yield and structural requirements.

Vallière, Amundi: Yes, but the bulk of the market is local, German-speaking banks. In the other 25% are sometimes insurance companies, sometimes Asian clients.

In the Euro PP, the LBO and those kinds of disintermediary markets, you will find 90% of the investor base being institutional investors.

So institutional investors really can’t compete in the Schuldschein and find an attractive risk structure, except if they want to build a very granular portfolio. Because they will compete with banks that have very cheap funding from the ECB.

In the latest LTRO [longer term refinancing operation] there was an adjudication of in excess of €200bn with a margin between zero or minus 40bp. So how can you compete if you are an institutional investor? There’s no way.

GlobalCapital: That raises an interesting point. With the present monetary conditions potentially tailing off, and the ECB withdrawing its support from the market, does the future look brighter for institutional investors to get involved in private debt?

Richard, Muzinich: Maybe on the direct lending side, if banks have less capacity to lend money and companies are continuing to grow and have funding needs for acquisitions, expansion, refinancing, dividend recaps.

On the other hand, I would moderate this optimistic vision by saying that also the end of QE would impact the M&A market, the LBO market. A slowdown in debt capacity will, of course, impact companies, so sometimes it will be difficult to lend money. So it’s not all bright, but it might provide some support.

Kyra Guerrida, UniCredit: But we started this discussion by saying that the Euro PP market has been a bit disappointing in volume. I think the end of TLTRO should definitely bring some growth to this market. The Euro PP will probably be more attractive for an issuer, compared with bank financing.

So, for sure, 2018 should be brighter for Euro PP opportunities because there will probably be less competition. Besides the TLTRO element, rates are expected to rise. We are already seeing some issuers knocking at our door, while years back we were knocking at their doors to pitch the Euro PP market. We are also seeing more demand for longer dated maturities.

Richard, Muzinich: And for fixed rates. Because if rates go up, of course for an issuer it’s much better to have a fixed rate.

Vallière, Amundi: I think fixed or floating is really a technical factor. Every company and investor has the capacity to manage their interest exposure.

But coming back to the question about QE, there might be a kind of paradox where there is no direct correlation between the capital raised, the excess liquidity and the investment opportunity.

Today the market is really characterised by excess liquidity, and really the question is: will investors spend this money wisely? Back in 2008-9, there were very interesting investment opportunities but there was absolutely no capital, no investor willing to invest. So there is not a direct correlation between the capital available and the investment opportunities.

As an institutional investor, when you look at the disintermediation market you need to remain very diligent and disciplined, very rigorous, because what we see at the moment with this excess liquidity is a slippage in risk management, with lower financial covenants and legal documentation. So, it’s a bit of a paradox. Disintermediation is coming up but the excess liquidity reduces the attractiveness of the market.

Richard, Muzinich: And what’s difficult is that our end investors are asking us to invest because they also have this excess liquidity on the balance sheet and it’s costly for them. So they ask us to put some pressure to invest. Sometimes we see some great credit profiles — it’s fantastic. But we all recognise that on pricing and documentation something is not really going in the right direction — or is already not right. What do we do? Is it better for the investors to have this cash on balance sheet or to invest at 3% in a transaction that maybe three years ago would have been funded at 5%?

GlobalCapital: I guess it depends on the company?

Richard, Muzinich: You’re perfectly right and I fully agree with Thierry’s approach. Either you say ‘I’m not investing because I don’t want to be part of these market conditions’ or you have a different approach — you say: ‘I will be very rigorous on the credit profile’ but you are more open and flexible regarding the pricing, the documentation.

GlobalCapital: What are you more willing to let go of? Is it margin or is it covenants and strong documentation?

Maspétiol, Aviva: We have agreed with our investors that we will deliver investments within a certain credit spectrum, with a yield. The main danger is to be driven by yield and to go outside this credit spectrum and move south in terms of risk.

I think you have to be very clear with your investors. They know exactly where the market is. The main focus is analysing the risk and making sure it really fits with your mandate.

The second is legal protection. Whilst we have to be pragmatic, we should not get rid of the protections which really matter — but you can allow some flexibility and that’s what corporates are looking for when they are looking at investors. This is where we can add value to them.

We have to remain very disciplined as today there are a lot of transactions in the market. Given the amount of liquidity, almost every company can find a suitable financing.

So you have to be very selective, but if there is a good transaction you have to be ready to be aligned with market pricing.

But the main priority is to stick to your mandate. Sometimes it’s very surprising to see that some asset managers are simply driven by yield.

De Graaf, Helaba: That’s very interesting because we, as a Schuldschein arranger, are really looking for the quality of issuers. We have a responsibility to investors and savings banks to provide them with issuers with good credit profiles. Unfortunately, we have seen in the past that there were some issuers who failed. Helaba is really taking care to provide good issuers.

Helaba only arranges deals for our core clients. In most cases we are one of the issuer’s lending banks. That can happen through a direct engagement in the Schuldschein transaction or other financing facilities of the client. We act as an investor on our balance sheet in roughly 50% of the issues we lead.

Spitzner, BayernLB: This is something every arranger has to do, because that’s the goal: to keep it a high quality market for reliable clients. There are some crossover names, but the bulk of issuers are clearly investment grade.

Of course, spreads have come down, as a result of competition and demand, but the market is growing. New issuers, domestic and international, are coming to the market. They are in turn attracting new investors, also international ones.

That’s why we, as the arrangers, have to pre-select as much as possible and not let the Schuldschein market become some kind of high yield market. We also don’t see the typical Schuldschein investor base, consisting of conservative investors, taking credits that are too complex on to their balance sheets, so there’s a natural selection as well.

Some people talk about the documentation getting looser, with fewer covenants, but it always stays in accordance with the borrower’s other facilities, through, for example, cross-default clauses.

Guerrida, UniCredit: Actually, the Schuldschein market today is mainly an investment grade market. But for sure, there is demand for other types of credit. Because the format is one thing, the quality of the issuer is another.

Another point is that the issuer base for the Schuldschein is diversifying, but it’s still three quarters German and Austrian issuers.

But I’m sure the Euro PP investors looking at French and Italian credit would be more than happy to invest in German credit if some issuers popped up, more on the high yield and crossover space, which is not happening for now.

So today the main channel of Schuldschein funding, the classical bank lenders, want investment grade-type issuers, but I think there will be demand on the investor side for lower quality credit in Germany.

GlobalCapital: Can I just be a little bit mischievous, though, and say that with the Schuldschein, we all think it’s an investment grade market but most of the issuers aren’t rated. I know they have internal bank ratings, but is the Schuldschein market being totally honest with itself?

Guerrida, UniCredit: Well, at least it’s investment grade in terms of pricing.

Waddington, Commerzbank: It’s interesting: investors in Schuldscheine are clearly private debt investors. They invest in unrated credits. However, the level of analytics will probably not be the same as institutional investors conduct, because on the whole the credit they’re looking at will be investment grade or crossover, while in most cases the institutional investor will be looking at much longer tenors or investing further down the credit curve.

Are the issuers investment grade or not? Investors have to take their own view on that. Some say ‘no, not for me, thanks’; others, ‘yes, the risk/return works for me’. Certainly the commercial banks have a strong skill set of looking at unrated debt and they’ve been doing it for years. So they usually have a pretty good sense of what works for them and what doesn’t.

Some issuers are net cash positive and others are between two and three times levered on a net debt basis.

A lot of these companies wouldn’t get investment grade ratings if they went to an external rater on account of their size. So not all choose to be externally rated. But on the whole, 1.5 to three times is probably the typical net debt to Ebitda metric we see. The leveraged loan borrowers can go from four, if it’s quite a cyclical credit, to maybe six if it’s quite a stable credit in the single-B space.

Vallière, Amundi: At the end of the day, the Schuldschein market is not an institutional investor market. We invest in it when we find really investment grade transactions, but otherwise it’s completely crazy to invest at this kind of price on such a documentation.

But there are two different Schuldschein markets. One is really dedicated to local German companies, and how can you say they are investment grade? On average they have €200m or €300m of sales. They are not investment grade because of their size. You don’t have any single investment grade company doing €200m sales. Pricing-wise and documentation-wise, they benefit from investment grade conditions, which is completely crazy from an institutional point of view.

Then there is the second market, for larger companies. This one we consider is more a crossover market than a real investment grade market. We invest in this market, when we are comfortable with the company, the pricing and the documentation. It means we’ve just decided with the company that we should go for a specific legal format, which is the Schuldschein.

Otherwise, we won’t do Schuldschein where you are only going to have one or two weeks to analyse a company that you don’t know and you probably won’t see.

Waddington, Commerzbank: Usually Schuldscheine are three to four weeks in the market. But I take your point. You usually do more in-depth analysis and I would expect that from an institutional investor.

Vallière, Amundi: Our rationale is really that we should come back to fundamentals. There is asymmetric risk. We are doing credit. There is no upside in what we are doing. If everything goes well, we will be repaid.

So the only thing we can compromise on is not risk management, it’s pricing. If we miss the objective of a fund by 10bp or 20bp, it won’t be a big deal. But if we have to manage one, two, three, four defaults in a portfolio, it will kill the whole return of the portfolio and probably damage our franchise. Because we are not managing very diversified portfolios: we only have between 20 and 40 transactions in the portfolio for this kind of strategy.

Maspétiol, Aviva: In principle, we are agnostic about the format. Whilst we have done Schuldscheine in the past, we don’t any more. We can have a lengthy debate about the importance of the US market or the Schuldschein. I think they are all complementary. Issuers are very agnostic too: they are driven by the price and also by whether the product is borrower-friendly or not.

So on paper we can do everything — US PP, Schuldschein, Euro PP, etc — as long as the risk/reward is attractive for our clients and matches our mandate. So if tomorrow you offer us a Schuldschein which meets all these criteria, we can do it.

GlobalCapital: Just bringing it back to Euro PP, one of the successes in the early years of this market was that it was used by non-French borrowers. Famously, Prada did a Euro PP and some Belgian and Spanish borrowers. Have non-French borrowers been as frequent in the Euro PP market in recent times?

Maspétiol, Aviva: I think part of the answer is: how do you define Euro PP? But that’s another story. We see more non-French borrowers, simply because French investors are more open to them. And part of our strategy is to target a portion of them. For instance, in our fund now we have 30% dedicated to Spain and Italy, so yes, we definitely see more transactions than we used to in the past. Because the barriers about Spain and Portugal and Italy are less important than they used to be. We talk more regularly to our investors about that and they are more open to it, maybe sometimes for the wrong reasons.

GlobalCapital: For yield?

Maspétiol, Aviva: Yes, which is not a good reason from our perspective. Our view is that there are very strong credits in Italy and Spain and we have to identify them. The only restriction we have is that we don’t have a local team. So we have to partner with either banks or independent advisers who can support us to identify the local market and know a bit more about the management, stake out the shareholders, which is key in our credit analysis. We know all the risks in the market pretty well but it’s hard to work outside France when you are not locally based and don’t have local expertise.

Vallière, Amundi: The European Union is not homogeneous. So you do have some corporate law, creditor rights, tax issues that are different in the various countries, plus you have different banking systems. Therefore, you need to have people on the ground.

In Germany you have a number of very interesting companies but you have this Schuldschein market. So from an investor perspective it’s a difficult market.

We are looking at Italy and we have people on the ground. In Italy you have some interesting private companies, but with difficult financial profiles — look at the level of NPLs in the regional banks. Probably 20% of the transactions we did last year were in Italy, but it’s a bit challenging when it comes to the financial profiles of those companies with a lot of short term or uncommitted financings.Spain and Portugal are interesting too, but with smaller companies and also with a lot of regional banks.

Then you are left with France, where we are a bit overweight, because there are only four or five national banks. You have some companies that have sound financial profiles but the banks are not lending to them. So it’s easier to invest in France, but you find some interesting opportunities in Italy and Spain. In Germany, frankly speaking, hardly any; and sometimes in the Nordic region. So unfortunately it’s true that our portfolio has a bias towards France. Fifty percent of the transactions we did last year were in France.

Richard, Muzinich: We are 29 people in Europe, spread locally in different countries — Italy, Spain, the UK, Germany, Ireland, France and Switzerland.

We have a bit of a different view on Italy. It’s a very dynamic market, first of all, because banks are not in very good shape, for the reasons mentioned by Antoine. So the companies need a diversified source of funding, that’s for sure.

There are very interesting companies with strong credit profiles. We see a lot of typically family-owned companies that are either looking for growth capital, or starting to bring their capital to private equity firms but for minority stakes. In terms of deal pipeline, the Italian market is the most dynamic for us today.

Spanish companies are in good shape, because they have been able to pass the last crisis and we know it was very difficult in Spain. And the banks there, even if they are limited in number, are in good shape, so able to lend money. And we see more competition from other credit funds and international private debt funds entering this market. So competition is a bit stronger than in Italy, but with good companies.

We hired two people last year in the German market and had exactly the same analysis as Thierry. That is the reason why we did not launch a local fund in Germany, because the pricing was too low. This year, we had closed one transaction in the German market with an attractive risk/reward ratio. There are very interesting and numerous opportunities, but not corporate, they are LBO transactions.

GlobalCapital: Are investors feeling more competition from direct lending or unitranche funds, which will take a whole loan themselves and completely bypass the banks?

Maspétiol, Aviva: Generally speaking there’s a lot of competition because there’s a lot of liquidity. Funds are launched every month and some teams are being set up. So I wouldn’t stigmatise the unitranche funds as our main competitors. The overlap is very slight between what they do and what we do.

Our main threats are those who are not disciplined and are ready to accept a lot of flexibility, because of the pressure they have from their limited partners to invest very quickly in many transactions. That’s the main threat in this market.

GlobalCapital: Thierry, are you tempted to do direct lending yourself?

Vallière, Amundi: We have done very few transactions because the bulk of the direct lending space is really towards unitranche, stretched senior and those kinds of things where you sell investor returns between 5% and 7%. It’s a different business from what we’re doing in most of our funds.

I think there is enough space for everybody. You have some space for commercial or investment banks, you have some for institutional investors like us, you have some for unitranche. It might happen that, yes, we chase the same deals but the real issue today is the excess liquidity and how to invest our money in the current market. To do so, we need to stay very rigorous, very vigilant and stick to a disciplined investment process.

Waddington, Commerzbank: Banks will be at the lower end of the return spectrum, insurance companies in the middle and private debt and unitranche lenders at the higher end. Different investors have different sweet spots but the excess liquidity is creating issues for all investors.

Vallière, Amundi: The way we pitch institutional investors is we tell them this asset class delivers a reasonable premium because there are no tricks in what we are doing. We are not magicians. So if a transaction pays a 7% return, there’s no magic. It means there is an underlying risk. If I’m doing a transaction that pays 3%, it’s because in terms of relative value I can assess that in liquid markets for a similar risk I would be getting 1.5%, 2% or whatever, and I can demonstrate to my institutional investor that, indeed, they come to the private platform and they get the premium they were looking for. They get the diversification and all those other aspects.

But there is no magic to what we are doing. We need to deliver a premium in the range of 100bp to 200bp.

Richard, Muzinich: Because there is too much liquidity today in the market, this theory that the return reflects the risk is not always true.

Maybe the Schuldschein return sometimes doesn’t reflect the risk. Sometimes it could even become an opportunity on transactions. When a company comes to see us, usually it’s after trying before with their banks, especially small companies. That’s the natural way they develop their financial strategy.

If they come to see us, it’s notably because the dialogue with the banks was not conclusive, not because the credit is not good, not always. It’s because their needs — including for execution risk and confidentiality — are not in line with what the banks are willing to offer.

We don’t always have incredible opportunities to take acceptable risks with good pricing, but we have some opportunities. But we also need to be very careful.

Maspétiol, Aviva: Coming back to your question about competition, given the complexity of this market, we are trying to differentiate ourselves. It’s hard, but there are three things we look at when we define a strategy. First: what is the depth of the market? Are we able to originate enough transactions with the same discipline? Second: what is our track record? What is our ability to deliver this mandate? Are we credible enough? And the third point is whether the risk-adjusted reward is relevant enough for our investors.

That has really helped us to position ourselves with a different angle. Because the risk otherwise is that your investors won’t see the difference from unitranche, or someone who’s doing LBOs.

Guerrida, UniCredit: When a bank meets a corporate issuer, the goal of the meeting is to present different possibilities of funding. At UniCredit we cover corporates from different angles — cash management, lending and many other products.

And when it reaches the point of proposing financing, we are bound professionally to present the different options: one could be bank lending, one could be classical syndicated loans, a revolving credit facility, one could be a Euro PP...

It’s not necessarily that one will replace another, it could be a combination. An issuer can do bank lending for part of its needs and a seven year PP with a bullet maturity, depending on its credit quality.

I think it’s a bit of a shortcut to say that issuers go to investors because they don’t find bank lending. With bank lending, the average maturity is probably between one and three or four years, and depending on the market conditions and the excess of liquidity, we have been seeing more and more bank lending with very light covenants.

Waddington, Commerzbank: If you wind the clock back 10 years to 2008, this conversation about the choice of different private debt products just would not have been possible. Here in France the options on the table were a rated bond issue or bank debt. There wouldn’t have been a lot of additional options.

The loan market in 2008 wasn’t in great shape. Most banks were having a tough time and their balance sheets were constrained.

Today, issuers have lots of choice. There is the unrated bond, you’ve got Schuldscheine, the Euro PP, and you’ve also got direct lending…

There’s more competition, more choice — and probably too much liquidity — but an issuer has many more options than it had in 2008.

GlobalCapital: We’ve talked a lot about liquidity, meaning excess demand. I keep hearing from some of you that we have to be careful, we have to select the right credit, we have to proceed with caution, and that tells me you are worried about how liquid things are and how long it can carry on. If we gather here in a year’s time, do you think demand will have fallen in debt markets? Do you think we’ll be talking about a tighter market? And could the great choice issuers are enjoying start to decrease as the central banks begin to normalise conditions?

Richard, Muzinich: There is a point where we cannot continue in this direction. Leverage is going higher and higher, margins are decreasing day after day. For us it wouldn’t work. At some point in time, investors will have less appetite because below a certain level they are not interested any more. But it will also be a matter of relative value.

Guerrida, UniCredit: I think that the end of QE in Europe will be a trigger element in capital markets as a whole.

Euro PPs will then be assessed relative to other instruments. If investment grade comes back to 2% at 10 years, a Euro PP will probably require 3.5%. The question is not: is it right to buy today at 3% when two years ago it would have been 5%? It’s what you can get today, relative to another asset of a different quality.

It’s a dynamic market with dynamic pricing, which I think is very difficult for investors.

Waddington, Commerzbank: I think the products are here to stay. Obviously as some of the excess liquidity is taken out of the market I would expect pricing and structures to normalise. We’ve been living in this world of über-liquidity for a while and from an investor’s perspective, seeing some of it ebb away is not a bad thing.

The issuers might have to pay a bit more, but they’re paying an unnaturally low coupon at the moment.

In Europe we still have a very competitive banking market compared with the US, where capital markets are much more efficient.

Over time I think we will see more institutional activity and deeper capital markets coming to bear, not to the same intensity as in the US, but I can see Europe moving more in this direction.

De Graaf, Helaba: It’s a macroeconomic effect and we are anticipating that the ECB is going to change its policy in September. Another thing is we see more volatility in the market, on the equity market and on unrated bonds, for example. I think the volatility is a signal that the situation will be going back to normal.

GlobalCapital: As we have discussed, Europe doesn’t have a single private debt market but lots of different markets. I think that’s great, but should the European Commission be doing more to encourage a more co-ordinated approach to private debt in Europe?

Guerrida, UniCredit: What does that mean, a co-ordinated approach? Tax co-ordination?

De Graaf, Helaba: Even more regulation?

GlobalCapital: Yes. Or less regulation. We’ve talked about how lots of different markets are working maybe against each other — Schuldschein versus Euro PP, etc. Could you do it in a single product?

Richard, Muzinich: As in the US, you don’t have a single product. Because the products have to answer two needs — the borrower’s and the investor’s. Do we have one single type of investor? Do we have one single type of borrower? No and no.

Guerrida, UniCredit: And the strength of the Euro PP market — which is probably what you are pitching to your end clients — is the abilities and resources many investors have to negotiate terms bilaterally with the issuer.

If you get too harmonised a market, then the Euro PP would be like the Schuldschein and I’m not sure everyone would be happy with it. And then there is the default law, which in each country is different.

Maspétiol, Aviva: So far, the regulator, the finance ministry, the central banks are looking very closely at how these markets develop but equally letting the stakeholders drive it. And they have a pretty clear message — ‘we trust you, but don’t get things wrong’. So we are accountable and that’s probably a good way of working.

Spitzner, BayernLB: Yes, that’s absolutely correct. I think too much regulation does not help in the end because it leads to inefficiencies and too much administration. Competition itself will help to guide the market in the right direction.

GlobalCapital: What about the impact of technology? We’re beginning to see businesses offering a platform for companies to borrow from, without banks or direct contact with investors. If we’re here in 12 months’ time do we expect to have a fintech person in the corner talking to us about how they are the future of private debt markets?

De Graaf, Helaba: That’s a really good point: in mid-March we launched our digital platform to distribute the corporate Schuldschein with our partner, VC Trade. It’s a single platform where everything from the origination side, the legal side, the issuers and investors up to the back office, it’s all done on the same platform.

Our first deal was a green Schuldschein from Verbund, a leading energy provider in Austria. Other deals are in the pipeline. Digitalisation helps the issuer to have more transparency and cost-efficiency for placements. We anticipate it would also reduce the time it takes to place a Schuldschein from about nine to five or six weeks.

GlobalCapital: It’s interesting that the Schuldschein is a product where blockchain has been applied, with deals for Daimler and Telefonica Deutschland.

De Graaf, Helaba: It’s a different approach. The advantage of our platform is that it’s an open platform, it’s not just for Helaba.

Guerrida, UniCredit: But I hardly see it as suitable for the Euro PP market. I can’t imagine an Italian mid-cap company where it is a struggle to publish results in English going digital...

Richard, Muzinich: In France online lending represents 1% of the debt funding raised. It’s small but the development is incredible. In some platforms you have retail investors putting in hundreds of euros per transaction, and on the other side vehicles dedicated to institutional investors putting in a large part of the funding. I’m sure that in one year it would be interesting to have a person from the lending platform and a blockchain expert to speak, as well.   


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